Category: Types of Investment Fraud

Did you lose money because of a securities transaction you did not authorize? Rules against unauthorized trading are meant to prevent brokers from making trades without their investor’s approval. Brokers should always have their client’s authorization to place a trade unless they place trades in an account approved for discretionary trading. Even then, FINRA requires firms to carefully review the discretionary trades for suitability.

FINRA Unauthorized Trading Rule

FINRA Rule 3260 states that no broker “shall exercise discretionary power in a customer’s account unless such customer has given prior written authorization.” Discretionary accounts are still subject to firm supervision. The firm or supervisor “shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals to detect and prevent transactions which are excessive in size or frequency.”

Because firms have a duty to approve and review discretionary trading accounts under FINRA Rule 3110, investors can hold their brokerage firm liable for losses when brokers execute excessive or unsuitable trades in their discretionary accounts.

What is the Difference Between Discretionary and Non-Discretionary Accounts?

Non-discretionary accounts are accounts in which the customer retains discretion and makes the final decision about each trade. These accounts are attractive to most investors because they come with lower fees and investment minimums.

In non-discretionary accounts, the broker executes client-approved trades at the best available market price. A broker may recommend trades for the client in a non-discretionary account and execute those trades once they have authorization from their client.

Can Investors Authorize Trades in Non-Discretionary Accounts?

Having the investor’s consent to exercise discretion is not enough. On June 27, 2021, an investor consented to a $5,000 fine and a 10-day FINRA suspension following allegations that he failed to receive written authorization to place discretionary trades, despite the fact “the customers knew [the broker] was exercising discretion in their accounts.” According to FINRA, the brokerage firm had not approved any of the accounts for discretionary trading.

Examples of Unauthorized Trading

Not all unauthorized trades look the same. Here are some of the most common types of unauthorized trades:

1. A broker may mark unauthorized trades as unsolicited, making it seem as if the investor requested the trade without a recommendation from the broker.
2. Sometimes, brokers will enter trades and then try to obtain the client’s consent after the fact.
3. In other cases, a broker may agree to an investment strategy with the client and then fail to receive authorization for every trade that fits the approved strategy.

Time-and-Price Discretion in Non-Discretionary Accounts

There is a small exception to the discretionary trading rule: investors may give their brokers time-and-price discretion in a non-discretionary account.

Time and price discretion means that a broker has authorization to execute certain trades if they occur within a specified timeframe or at a certain price. Investors may authorize their broker to execute time and price discretion without giving them discretionary power over the account.

FINRA rules also state: “The authority to exercise time and price discretion will be considered to be in effect only until the end of the business day.”

Unauthorized Trading Can Take Place in Discretionary Accounts

Investors who opt for a discretionary account decide how much control the broker will have over trading. In some instances, there may be unauthorized trading even if a customer has granted discretionary power to the broker. For example, if the investor instructed their broker to include a mix of stocks, bonds, and mutual funds in their discretionary account, but the broker concentrates the account in only stocks, the broker will have executed an unauthorized trading strategy.

How Do Investors Find Proof of Unauthorized Trades?

FINRA encourages investors to review their brokerage account statements and trade confirmations. Investors receive quarterly account statements and written notification of trade confirmations at or before the completion of a transaction. Keep in mind that you may not receive these documents from your brokerage firm. If your firm is an introducing firm, you may receive your statements from the clearing firm instead.

Spotting unauthorized trades can be tricky.

In September of 2019, The Wall Street Journal reported that Mitsubishi Corp had fired a trader following allegations that he lost $320 million after taking a gamble on oil derivatives. The trader reportedly disguised these transactions to make them look like hedge transactions. This case underlines that firms must also play an active role in detecting particularly sophisticated unauthorized transactions.

Investors Can Only Authorize Investments They Understand

Brokers have a duty to accurately describe an investment to their clients. If you did not understand the nature of the securities transaction because your broker manipulated or deceived you, you may have a case for FINRA arbitration. FINRA Rule 2020 states that brokers may not use manipulative, deceptive, or other fraudulent devices.

Unauthorized Trading and Forgery

Investors may be surprised to learn how common forgery is in the securities industry. Forgery often comes up in cases of unauthorized trading. To make their trades appear authorized, certain brokers forge their client’s signature or use a photocopied signature. Brokers may forge signatures simply to save time, but it can still get them into serious trouble with FINRA.

What Do I Do if I Believe My Broker Executed Unauthorized Transactions?

Bring evidence of the unauthorized transactions to your firm. Next, you can file a Statement of Claim with FINRA and contact a securities attorney. Most brokerage firms require investors to settle disputes through FINRA arbitration – a process specific to securities disputes and an area where a securities lawyer is an invaluable resource.

Unauthorized Trading Penalties

Brokers found to have executed unauthorized trades may have to pay a fine and face a FINRA suspension.

Once FINRA initiates an investigation, brokers must turn over any information related to a suspected unauthorized trade. FINRA Rule 8210 requires that brokers provide documentation and testimony at FINRA’s request.

If the broker does not comply with FINRA requests, FINRA can impose a suspension until they comply. The suspension can also convert to a bar if the broker remains uncooperative.

My Broker Executed Unauthorized Trades. What Now?

If you believe your broker executed unauthorized trades, your first step is a case evaluation with a securities attorney. Contact Patil Law at 800-950-6553 to schedule a free case review with an experienced securities lawyer. Our securities attorneys can maximize your chances of winning your arbitration or obtaining a favorable settlement as quickly as possible.

If an investment is unsuitable, it means that it is not fitting or appropriate for you. In securities law, what makes something unsuitable?

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all brokerage firms doing business in the United States. FINRA sets a suitability standard, and that standard obligates brokers to make recommendations they believe effectively suit the interests of their clients.

What Makes an Investment Suitable?

FINRA governs general suitability obligations for brokers. FINRA Rule 2111 sets out three components of suitability obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability.

1.       Customer-Basis Suitability

Information on a customer’s age, financial situation, investment objectives, investment experience, and risk tolerance should all inform a broker’s decision to recommend a particular security to their client.

•   The cost of the investments may be too high or too high-risk for a retired client who relies on their brokerage account for income.
•   Investors might need to access their funds in an emergency, which means that investments should not be too illiquid, meaning investors cannot cash out without incurring significant fees.
•   Like non-traded REITs and leveraged ETFs, complex investments should be left to investors with more trading experience.

2.       Reasonable-Basis Suitability

Reasonable-basis suitability means that the investor is either capable of evaluating the risks associated with an investment themselves or has agreed to let their broker assess the risks for them. If the broker does not understand an investment, they cannot recommend it to their clients.

3.       Quantitative Suitability: Excessive Trading and Churning

FINRA 2111 also requires brokers to recommend quantitatively suitable investments–meaning the number of securities transactions must make sense for the investor. Each securities transaction comes with fees, so too many trades will make it more difficult for an investor to profit. Suitability also includes making sure transaction costs are not excessive.

Executing too many transactions in an investor’s account is called “churning” or “excessive trading.” Brokers might engage in this type of misconduct to generate more commissions for themselves.

Does FINRA Require Brokers to Work in their Clients’ Best Interest?

Yes. Regulation Best Interest (BI) is a Securities and Exchange Commission rule that requires broker-dealers to only recommend financial products to their customers that are in their customers’ best interests, and to clearly identify any potential conflicts of interest and financial incentives the broker firm may have for the sale of those products.

The Regulation BI falls under the Securities and Exchange Act of 1934 and establishes a standard of conduct for brokers and brokerage firms when recommending any securities transaction or investment strategy. Regulation BI was put into place in 2020.

Previous to Regulation BI, brokers were only held to the suitability standard – meaning that when brokers advised their clients, they only had to recommend investments that were suitable but not necessarily in their clients’ best interest. Of course, some financial advisors have always and continue to be considered fiduciaries and are treated to heightened standards and requirements.

Regulation BI addresses several issues that affect investors and their professional relationship with financial professionals, such as disclosures about products and services, the conduct of broker firms, and how information is given. The goal is to help investors make better, informed decisions, as well as to protected investors.

​​What is a Fiduciary?

A fiduciary is a person that acts on another’s behalf, putting the clients’ interests ahead of his own while preserving good faith and trust. Brokers and financial advisors are arguable fiduciaries, but jurisdictions can apply this differently. Regardless, brokers must adhere to FINRA 2111 and seek to act in their clients’ best interests.This is the main safeguard between investors and reckless brokers. Investors should always keep in mind that although brokers are obligated to recommend investments that they believe are suitable for the investor, it does not automatically mean the recommendations are best for the investor.

What Happens When a Broker Recommends an Unsuitable Investment?

Unfortunately, brokers often fail to uphold the duty to make suitable investments. As a result, unsuitable investment claims are among the most common FINRA arbitration cases. When an investor can show that a broker recommended an unsuitable investment, the firm may be liable to pay an investor back for their losses.

What Happens in a Suitability Arbitration Case?

When investors believe their broker recommended an unsuitable investment, they should enter a Statement of Claim with FINRA and begin the arbitration process.

Investors should also take proactive steps to avoid unsuitable investment recommendations in the first place. Before working with an investor, an investor should make sure to review their broker’s FINRA BrokerCheck record. Certain investors have multiple investor disputes on their record that allege they recommended unsuitable investments. Investors should always be wary of brokers who have been involved in suitability disputes.

If you discover your broker has a significant history of unsuitable recommendations, consider taking your business elsewhere.

My Broker Recommended Unsuitable Investments – What’s Next?

Investors who believe their broker may have recommended unsuitable investments should speak to a securities attorney and start gathering the documentation they will need to bolster their claim. If you specifically stated you wanted low-risk investments and then end up with a portfolio full of illiquid, high-risk securities, you may have an especially good case for FINRA arbitration. Contact the securities attorneys of Patil Law for a free case evaluation today: Call 800-950-6553 or email cp@patillaw.com for a free case evaluation.

Overconcentration, or “failure to diversify,” is a type of financial misconduct. It occurs when a broker concentrates an investor’s account in one particular investment, class of investments, or market segment, to the point that this concentration exposes the investment portfolio to an inappropriate degree of risk. If an investor loses money due to overconcentration, they should contact our securities attorneys to evaluate their case and determine if they may be entitled to a FINRA arbitration award.

When an account is overconcentrated, the price movement of the security (or market sector) could cause huge losses in the investor’s portfolio. For example, if an investor over-concentrates their portfolio in oil and gas investments, their portfolio could rapidly lose money when something like a global pandemic drives down the price of oil. Or an investor could be invested in only one type of security, like common stock, rather than a mix of stocks and bonds. Stocks are riskier than bonds and should only make up one part of a comprehensive investment strategy.

Overconcentration is the opposite of diversification, one of the fundamental principles of investing. To avoid the risk of concentrated stock positions, financial professionals should recommend a variety of investments, including stocks, bonds, mutual funds, and exchange-traded funds.

Is Overconcentration Always Against FINRA Rules?

FINRA Rules require that a broker only recommend suitable investments to their clients. Overconcentrating a client’s portfolio in a security or area of the market could be deemed unsuitable for the investor. Investors should review their holdings to determine if their advisor recommended an overconcentrated portfolio.

FINRA describes five basic types of concentration:

1. Intentional concentration. An investor may have intentionally invested in one type of asset as a personal preference, based on their belief that the investment will perform well in the future.
2. Concentration due to asset performance. One investment may have performed so well that it now represents a much greater percentage of an investor’s portfolio than it did before. Investors should always be aware that past performance does not necessarily predict future performance
3. Company stock concentration. Employees might want to invest their retirement in their company’s stock. FINRA warns against the dangers of holding too much company stock. Company loyalty should not detract from a sound investment strategy.
4. Concentration due to correlated assets. Investors might fail to diversify their portfolios by concentrating on investments in the same industry or geographic location. For instance, if you buy a lot of Apple stock and purchase a technology Exchange-Traded Fund (ETF), you are running the risk of losing money if the technology sector takes a hit. FINRA advises that you “look under the hood” of any ETF investments to ensure that these funds will help diversify your portfolio rather than offer more of the same type of stocks you already own.
5. Concentration in illiquid investments. This is particularly risky, especially for investors buying securities with money they might eventually need. Certain investments, like non-traded Real Estate Investment Trusts (REITs) and unlisted Direct Participation Programs, expect their investors to hold the investment for a long time. These investments may be tempting because of their potentially high returns, but investors who have to cash out of their illiquid investments will have to pay exorbitant fees and could still wait an extended period to access their funds.

How Does FINRA Define Overconcentration?

FINRA Rule 2111, also known as the suitability rule, defines overconcentration. This rule requires brokers to investigate investment attributes, including benefits, risks, tax consequences, and other relevant factors, to form a reasonable basis for an investment recommendation. “Suitability” encompasses suitable strategies as well as suitable investment products. Overconcentration is not a suitable investment strategy for most investors since it comes with unnecessary risks.

Brokers must consider their investor’s investing experience, age, financial goals, and risk tolerance before recommending an investment strategy. If an investor relied on their broker for recommendations, and the investor can demonstrate that their broker did not warn them of the risks of overconcentration, a FINRA arbitration panel may find that an investor is owed an arbitration award.

Example of Overconcentration

FINRA regularly reviews arbitration cases that allege unsuitable, over-concentrated investment recommendations.

For example, on July 30, 2021, an investor alleged that their broker over-concentrated their portfolio in high-risk investments. According to the BrokerCheck disclosure, these high-risk investments included Cottonwood Residential, Carter Validus Mission Critical REIT, and GPB Automotive.

1. GPB Automotive is part of GPB Securities, which was recently labeled a Ponzi scheme by the SEC and the FBI. Many investors have alleged their brokers did not conduct their due diligence when they recommended shares of GPB and should have known that the investment was at least high risk if not outright fraud.
2. Carter Validus Mission Critical REIT, which now does business under the name Sila Realty Trust Inc., is a non-traded Real Estate Investment Trust (REIT), an especially risky type of investment. “Non-traded” means that it is not publicly traded on a stock exchange, which limits the amount of publicly available information. This makes it more difficult to evaluate the company’s business model and strategy.
3. Cottonwood Residential recently merged with Cottonwood Communities, another non-traded REIT.

Concentrating on so many high-risk investments is unsuitable for most investors. The investor properly sought to recover hundreds of thousands of damages.

Why Do Brokers Ignore the Risks of Concentrated Stock Positions?

Your broker may have believed that a high-risk investment would pay off eventually, but they should still take your risk tolerance into account when they recommend an investment. In some cases, brokers might not be motivated to inform their investors of the risks of concentrated stock positions because of the high broker commissions that come with the transactions. (Investors have alleged that brokers who recommended shares of GPB Capital may have been motivated by especially high commissions.)

What Should I Do Now?

If you believe your portfolio lost money because of overconcentration, you should contact a securities attorney. A securities lawyer can help you decide if you have a case and what steps you should take to prepare for FINRA arbitration—the process most investors must undertake if they wish to recover investment losses. Get in touch with the securities attorneys of Patil Law for a free case evaluation today: Call 800-950-6553 or email cp@patillaw.com.

Before investing, your stockbroker must provide you with all the material information needed in deciding whether to invest. FINRA Rule 2020 specifically prohibits brokers from misrepresenting investments and omitting material facts. “Material facts” are facts that could help an investor decide whether an investment is right for them. The rule states: “No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.”

If your broker misrepresented or omitted information, your next call should be to an investment attorney.

What Happens When a Broker Violates FINRA Rule 2020?

In 2021, FINRA reported that misrepresentation and omission were among the top five most common FINRA arbitration disputes. Many of these disputes feature a broker who informed an investor of a security’s potential for gains but did not tell them about the significant fees, the likelihood of losses, or the amount they could save on sales charges.

Brokers may also fraudulently omit any conflicts of interest associated with an investment. For example, on June 29, 2021, the SEC alleged that a broker recommended that his clients enter into service agreements with three companies without disclosing his ownership of those companies. The SEC alleged that this is a material conflict of interest that should have been disclosed. Further, the broker allegedly misrepresented and over-stated the funds’ assets, allowing him to charge higher fees.

Types of Misrepresentation Investment Disputes

Misrepresentations may be either fraudulent or negligent. Fraudulent misrepresentation could be outright lies. But stockbrokers could make negligent misrepresentations by simply not knowing enough about an investment. Stockbrokers have a duty to understand the securities they recommend. If they recommend an unsuitable product with risky features that they simply did not bother to review, they may have made a negligent omission.

Misrepresentation Violates More Than One FINRA Rule

FINRA Rule 2020 overlaps with several other FINRA rules, all of which are designed to add layers of protection for investors.

1. FINRA Rule 2020 bolsters the requirements of FINRA Rule 2111, which requires that stockbrokers only recommend investments that suit their investor’s financial goals and risk tolerance.
2. FINRA Rule 2210 states that broker communications with the public should be fair. Fair representations highlight the risks associated with an investment as much as they focus on the potential for gains.
3. Investors can also cross-reference FINRA Rule 2020 with FINRA Rule 5210, which prohibits brokers from publishing false information about certain securities: “No member shall publish or circulate… communication of any kind which purports to report any transaction as a purchase or sale of any security unless such member believes that such transaction was a bona fide purchase or sale.” In other words, investors are not allowed to create the false impression that there is more excitement around a particular stock than there actually is.

Communications with Investors

FINRA’s Regulatory Notice 20-14 issued a warning regarding sales practice obligations for oil-linked Exchange-Traded Products (ETPs). Exchange-traded products are designed to track a particular index. In this case, they tracked oil futures. These speculative investments generate a return for the investor if the strategy employs a correct guess about the future price of oil.

FINRA Notice 20-14 cited FINRA Rule 2210 and pointed out that brokers must state in sales communications that oil-linked ETPs are short-term products that are not designed to be held over the long term. In the notice, FINRA underlines that burying information in a dense prospectus is not enough. Brokers must make sure that they clearly state these risks in the marketing material as well: “FINRA reminds firms that providing risk disclosure in a separate document such as a prospectus does not cure otherwise deficient disclosure in sales material, even if the sales material is accompanied or preceded by the prospectus.”

Investment Fraud Example of Misrepresentation and Omission

In 2016, FINRA fined MetLife Securities for $25 million following allegations that they made negligent misrepresentations and omissions related to variable annuity replacement applications for thousands of customers. Variable annuities are complex products that even experienced financial professionals may struggle to comprehend, making them especially easy to misrepresent to investors. FINRA’s chief of enforcement stated, “Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning. Firms engaging in this business must ensure…that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling.”

According to FINRA, the misrepresentations made the replacements appear more beneficial than they truly were. The new variable annuities were more expensive than the original contracts, and FINRA alleges that MetLife did not accurately describe the differences between the new variable annuities and old variable annuities. Notably, a substantial portion of the firm’s marketing efforts involved switching their investors out of variable annuities. In a six-year period, the variable annuity replacements allegedly generated at least $152 million in commissions for brokers.

FINRA specifically alleged the following omissions:

1. MetLife represented to investors that their existing Variable Annuity was more expensive than the recommended variable annuity. In truth, the new variable annuities were more expensive.
2. MetLife Securities failed to disclose that the proposed variable annuity replacement would reduce or eliminate features like an accrued death benefit and guaranteed income benefits. Features like these are material facts that may induce an investor to accept or reject a contract.
3. Metlife Securities representatives allegedly understated the death benefits of the existing variable annuities.

Misrepresentations Regarding Taxes

Stockbrokers should always accurately describe the tax implications of a securities transaction. An investor recently alleged that her broker told her she could pay for a life insurance policy using funds from her IRA without any tax penalty. The investor alleged that she has since learned this is not the case. She filed an investor dispute and is seeking to recover her losses.

What Can I Do About Misrepresentation and Omission?

The misrepresentation cases mentioned above are just a few examples. If you believe your broker employed any type of manipulation or deceit, you may have a case for FINRA arbitration. Securities lawyers can help make the case that you relied on your stock broker’s recommendation. You may need to work with a lawyer to ensure that you can prove your case to a FINRA arbitration panel. Contact Patil Law today for a free case evaluation. Call 800-950-6553 or tell us how we can help with our online contact form.

Most people hire stockbrokers and financial advisors and stockbrokers to grow and protect their investment accounts. After all, these financial professionals are supposed to possess specialized knowledge of financial products and provide their clients with helpful and accurate advice. When you hire stockbrokers, you expect them to help you with your investments, not destroy the nest egg you have accumulated over years of hard work and saving.

Unfortunately, stockbroker negligence results in billions of dollars in losses for investors every year. If you believe your stockbroker or financial advisor committed negligence in the handling of your investment account, you could recover your losses through FINRA arbitration. Contact Patil Law today. You can call us at 800-950-6553 or email us at cp@patillaw.com.

What Is Stockbroker Negligence?

Stockbroker negligence occurs when a broker or investment advisor’s conduct falls below established industry standards designed to protect investors from unreasonable risk of harm. The Financial Industry Regulatory Authority (FINRA) sets rules for brokers to follow. FINRA’s rules protect investors from fraud, overreaching, undue influence, and manipulative practices by stockbrokers.

Unsuitable Recommendations

FINRA Rule 2111 requires brokers to recommend only investments and investment strategies suitable for the investor. Rule 2111 imposes three obligations on brokers. First, the reasonable-basis obligation requires the broker to have a reasonable basis to believe, based on reasonable diligence, that the investment or investment strategy recommended is suitable for some investors. Reasonable diligence should provide the advisor with an understanding of the risks and rewards associated with the recommendation. Next, the customer-specific obligation requires stockbrokers to have a reasonable basis to believe the recommendation is suitable for a particular customer’s investment profile. Whether an investment is appropriate for a customer’s investment profile depends on many factors, including:

1. Age,
2. Financial situation and needs,
3. Tax status,
4. Investment objectives,
5. Investment time horizon,
6. Liquidity needs,
7. Investment experience, and
8. Risk tolerance.

The quantitative suitability obligation contained in Rule 2111 will be further explained in the next section.

Excessive Trading

In most cases, stockbrokers earn commission on every transaction they perform on behalf of their customers. This pay structure incentivizes some stockbrokers to make as many trades as possible, even if those trades aren’t beneficial to the client. Conducting multiple transactions with the intention of driving up commissions is known as excessive trading or churning. That brings us to Rule 2111’s quantitative suitability obligation. Quantitative suitability requires the broker to have a reasonable basis for believing that a series of recommended transactions are not excessive and unsuitable for the customer when considered as a whole.

When a broker makes excessive trades, the client bears the burden of paying the outrageous commission fee to the broker.

FINRA issued a Regulatory Notice concerning quantitative suitability in 2018.

Overconcentration

You may have heard the phrase “Don’t keep all of your eggs in one basket.” When an investment account holds primarily one type of security, a downturn in the market can result in significant losses for the customer. Instead, a customer’s investment portfolio should stay adequately diversified to lessen the risk of suffering losses during times of market volatility.

Unauthorized Trading

Unauthorized trading occurs when a financial advisor or stockbroker conducts transactions in a customer’s investment account without consent or authority. The way brokers violate this rule depends on whether the customer has a discretionary or non-discretionary account.

When an investor opens a non-discretionary account, the broker must obtain the investor’s consent prior to every transaction made in the account. Alternatively, when an investor opens a discretionary trading account, the investor gives their broker the discretion to make trades in the account without obtaining consent for each individual transaction.

Unauthorized trading violates FINRA rules. However, brokerage firms often try to hold the investor responsible for the misconduct. The firms claim that because you didn’t object to the unauthorized trade, you ratified the transaction when you received your monthly statement reflecting the unauthorized trade. If you notice trades in your account that you didn’t authorize, reach out to a stockbroker negligence attorney today. You could sue a financial advisor or broker for negligence to recover your investment losses.

Material Misrepresentations or Omissions

FINRA requires stockbrokers to disclose the material facts about an investment that help the investor make an informed decision about whether to purchase the investment. Misconduct allegations arise when a stockbroker misrepresents information about an investment to their client. Alternatively, some allegations involve a broker omitting material information about a particular investment. Examples of ways brokers may misrepresent or omit information to their clients include:

1. Failing to inform a client that an investment poses unnecessary risk;
2. Misleading a client about the expected future performance of an investment;
3. Offering a positive research report about an investment while knowing the company offering the investment is headed for bankruptcy; and
4. Failing to disclose all the fees associated with a particular investment.

If your stockbroker or financial advisor misrepresented or omitted material information and that misrepresentation or omission influenced your decision to purchase an investment, you could recover any losses you suffered as a result.

Recovering Your Losses Following Stockbroker Negligence

Many clients contact us asking if they can sue a financial advisor for negligence that resulted in significant losses. In most cases, the investment contract between you and your financial advisor or stockbroker includes a binding arbitration clause. That means the only avenue available to recover your investment losses is through FINRA arbitration.

FINRA provides a forum for the arbitration and mediation of disputes between investors and their stockbrokers. The arbitration process offers a quicker resolution than the civil court process. FINRA imposes a six-year limit on filing arbitration claims alleging broker misconduct.

FINRA Arbitration Structure

A FINRA arbitration operates similarly to a trial. You and your broker act as the plaintiff and defendant while the arbitrator or panel of arbitrators acts as the finder of fact. Unlike in civil court, the losing party can’t appeal the judgment of the case. FINRA offers a Reference Guide that outlines the policies and procedures of FINRA’s dispute resolution process.

Filing a FINRA Arbitration Claim

You can initiate the arbitration process by filing a “statement of claim” with FINRA. FINRA refers to the party filing the claim as the claimant and the responding party as the respondent. The statement of claim should lay out the parties to the dispute, your allegations, the relevant period, and a demand for relief. The statement of claim gives you the chance to put your best foot forward with your complaint. Having an experienced securities attorney help you prepare your statement of claim can mean the difference between recovering your investment losses and forfeiting them.

FINRA will serve the respondent with your statement of claim. FINRA grants the respondent 45 days to respond to the statement of claim with an answer. A failure to respond could result in a default for the respondent.

Choosing an Arbitrator

Unlike the court system, FINRA arbitration gives the parties a choice in determining which arbitrator or arbitrators will hear your case. FINRA uses a computer algorithm known as the Neutral List Selection System (NLSS) to randomly generate lists of arbitrators from FINRA’s arbitrator roster. You can learn about the duties and obligations of FINRA arbitrators in the FINRA Dispute Resolution Services Arbitrator’s Guide.

In investor cases claiming up to $100,000, the parties receive a list of ten potential arbitrators. Each party can strike up to four arbitrators from the list, then rank the remaining arbitrators by priority, ultimately receiving a single arbitrator to preside over the claim.

In investor cases claiming over $100,000, the parties receive three separate lists of arbitrators. The first list names ten chair-qualified public arbitrators. The second list names fifteen public arbitrators. The final list names ten non-public arbitrators. Each party can strike up to four arbitrators on the first list, six arbitrators on the second list, and all the arbitrators on the final list. The parties rank the remaining arbitrators, ultimately receiving a panel of three arbitrators to preside over the claim.

Pre-Arbitration Phase

Arbitrators hold pre-hearing conferences that typically occur over the phone or online. At the pre-hearing conference, the parties establish a timeline for the case, receive a schedule for discovery requests and responses, and determine whether mediation could solve their issues. If you have evidence demonstrating the investment losses you suffered as a result of your stockbroker’s negligence, your stockbroker’s brokerage firm could offer you a settlement agreement to avoid arbitration.

Arbitration Hearing

The arbitration hearing offers investors the opportunity to tell their side of the story. The arbitrators provide each party a chance to give an opening statement, call witnesses, present evidence, and give closing arguments.  You can find more information about FINRA arbitration hearings through FINRA’s website.

Arbitration Awards

The arbitration panel should issue an award within 30 days from the date they close the record. The award will contain a summary of issues presented at the hearing, a ruling on damages and other relief requested, and fees assessed against either party. The losing party must pay the damages within 30 days.

Contact Patil Law Today

If you suffered investment losses as a result of broker negligence, you could recover your losses in FINRA arbitration. In most cases, a broker’s brokerage firm will hire a lawyer to represent the broker against your allegations of negligence. Having an experienced securities attorney to assist you in filing your statement of claim with FINRA and representing you in the hearing can level the playing field. Contact our office today at 800-950-6553 so we can help you recover the compensation you deserve.

Forged investor signatures can play a key role in financial advisor fraud. By forging a client’s signature, stockbrokers could sign a withdrawal slip or authorize fraudulent trades. The most deceptive fraudsters might forge documents to create the illusion of a successful investment with healthy returns for shareholders. Stockbroker forgery is a persistent problem in the securities industry and is yet another reason for investors to thoroughly review their account statements.

If you believe your stockbroker forged your signature, one of the securities lawyers at Patil Law can guide you through the next steps to recover your money. Stockbrokers who forge client signatures may have to personally repay any lost funds, and brokerage firms may be ordered to pay punitive damages for failing to supervise their representatives.

FINRA Rule 4530 and Stockbroker Forgery

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have implemented rules designed to stop brokers from forging investor signatures. Criminal convictions involving forgery result in a “statutory disqualification.” ​​Section 3(a)(39) of the Exchange Act states that certain misdemeanors and felonies disqualify an individual from working as a stockbroker for 10 years from the date of conviction. Those “certain misdemeanors” include forgery. FINRA Rule 4530 states that a broker must promptly report to FINRA if they are “the subject of any written customer complaint involving allegations of theft…or of forgery.”

FINRA fined LPL Financial $6.5 million following allegations that the firm had allowed a broker to remain associated with the firm even though he was found to be in possession of a forged instrument, resulting in a criminal misdemeanor conviction.

Stockbroker forgery also violates the following FINRA rules:

FINRA Rule 2010 states that brokers must observe “high standards of commercial honor and just and equitable principles of trade.”

By submitting documents with forged investor signatures, brokers break FINRA Rule 4511, which requires each firm to make and preserve accurate books and records.

Why would a Broker Forge an Investor Signature?

 Time. Brokers might forge their investor’s signature to save time. FINRA investigations have uncovered instances of brokers keeping their investor’s signature on file and affixing it to authorization forms. In these cases, the investor might not lose money, and the investor may have even authorized the transactions. Even so, firms might fire a broker for violating firm policies, and the broker could face a FINRA fine and suspension.

2. Commissions. Stockbrokers might forge a document to earn a more significant commission. Forgery allegations often involve insurance products. Variable annuities often come with huge commissions, often as high as 6% to 7%. Investors recently alleged that a broker submitted four unauthorized annuity applications on their behalf, electronically forging their signatures using DocuSign. Two of the contracts were for variable annuities. This fraud allegedly generated $68,000 in commissions for the broker.

3. Misappropriation of funds. Forged documents make it possible for fraudulent advisors to steal money. In 2019, the SEC revoked the license of an advisory firm called International Investment Group (IIG) following allegations of forgery.

According to the SEC, IIG operated as a Ponzi scheme, hid their losses, and sold investors $60 million in fake loan assets. IIG allegedly used the money from those sales to pay for redemption requests from earlier investors. To support the myth of these loans, IIG produced a forged credit agreement and other loan documentation. In one instance, an employee created a promissory note and credit agreement for a loan that allegedly did not exist. The employee allegedly created the forged documents by electronically copying signature blocks from older documents for legitimate loans. The SEC revoked the firm’s license and ordered the return of $35 million to their defrauded customers.

4. Unauthorized withdrawals. Brokers have used forgery to aid in the misappropriation of funds. In 2020, a broker consented to a FINRA bar following allegations that he forged withdrawal slips for the accounts of three customers, two of which were over 90 years old. (Forged withdrawal slips often tie in with allegations of elder financial abuse.) FINRA alleged that the unauthorized withdrawals coupled with unauthorized transfers allowed the broker to misappropriate $144,000 for his personal use.

5. Covering up mistakes. Plenty of brokers would prefer to forge their customers’ signatures than reveal they made a mistake. In one case, a broker forged an investor’s signature rather than admit they had mistakenly rolled over a customer to an IRA rather than a Roth IRA. Instead of delivering new paperwork for his customer to sign, the broker simply forged corrected documents.

6. Unauthorized transactions. The motive for forging customer signatures for an unauthorized securities transaction is not always clear but is a persistent problem, nevertheless.

According to one FINRA Acceptance, Waiver, and Consent agreement, a broker forged documents to avoid clarifying information with a customer. The broker allegedly recommended a five-year fixed annuity to their investor that supposedly came with a 3.15% interest rate. The investor signed papers authorizing the purchase of a fixed annuity with this interest rate, but the fixed annuity in question only came with an interest rate of 2.85%. Instead of informing the investor and requesting that they sign new documents, the broker simply forged the investor’s signature on the annuity application with the lower rate. The same broker engaged in similar misconduct with another investor, recommending a five-year annuity and then forging the investor’s signature approving the purchase of a seven-year annuity.

How Can I Detect Forgery?

Investors should review their account statements and ensure that each transaction has been authorized. If the investor has a non-discretionary account, every transaction must be authorized by the investor. FINRA Rule 4514 requires that brokers maintain signed, written authorization forms from their investors regarding any withdrawal of money from a securities account.

Investors can review authorization forms to look for forged signatures and should contact a securities attorney if they suspect their broker may have forged a withdrawal slip or other documents related to their securities account. If you suspect your stockbroker may have forged your signature, contact our securities attorneys right away. You can reach us at Patil Law by telephone at 800-950-6553, via our secure online portal, or by email.

Brokerage firms have a legal duty to supervise their brokers and the activity in their clients’ brokerage accounts. When brokerage firms fail to supervise, they can be held liable for any losses incurred as a result. To recover these losses, securities attorneys file arbitrations through FINRA against brokers and brokerage firms.

When you invest with a broker, you should be able to rely on their recommendations. Investors expect brokers to be informed about the investment products they recommend, along with client financial goals and risk tolerance. Firms serve as another layer of protection for investors, and FINRA requires that brokerage firms have systems to supervise and flag suspicious or unsuitable transactions.

Brokerage firms must be accountable when their brokers perpetrate fraud or misconduct towards clients. They must make informed decisions about who they hire and constantly supervise their brokers’ activities—the occasional check-in does not suffice. Failures can have significant consequences for investors, and they entitle investors to file claims to recover their investment losses.

What Constitutes Failure to Supervise?

Failure to supervise violates federal law and the Financial Industry Regulatory Authority (FINRA). Specifically, Section 15(b)(4)(E) of the Securities and Exchange Act of 1934 holds brokerage firms accountable for failing to adequately supervise brokers who commit federal securities law violations. FINRA Rule 3110 requires firms to establish supervisory systems and written procedures to prevent broker fraud and financial misconduct. Under FINRA Rule 3110, brokerage firms must:

“[E]stablish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules… [and] establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”

FINRA Rule 3110 also requires, “at a minimum,” that brokerage firms:

1. Designate one or more registered principals who have authority to carry out the firm’s supervisory responsibilities;
2. Use “reasonable efforts to determine that all supervisory personnel are qualified, either by virtue of experience or training, to carry out their assigned responsibilities;”
3. Assign each broker to a supervisory registered principal; and,
4. Require all brokers to participate in annual compliance reviews with their assigned supervisory registered principals.

Examples of a Brokerage Firm’s Failure to Supervise

Brokerage firms’ broad duty to supervise includes several specific obligations. In many of these instances, our team of failure to supervise investment attorneys can represent you and fight for the investment you lost due to a brokerage firm’s failure to supervise.  The following are all examples of violations justifying claims for recovery of investment losses:

1. Failure to review internal communications
2. Failure to review the incoming or outgoing correspondence
3. Failure to adequately monitor transactions in investors’ accounts
4. Failure to review or respond to investor complaints
5. Failure to adequately investigate suspected broker fraud or misconduct
6. Failure to confirm brokers’ experience, credentials, disciplinary history, or registration status
7. Failure to conduct compliance reviews on at least an annual basis
8. Failure to adequately safeguard investors’ funds and securities from fraud and misconduct
9. Failure to maintain adequate books and records
10. Failure to adopt appropriate supervisory systems and written procedures

Brokerage firms are in a position to prevent and uncover stockbroker fraud and misconduct, and the federal government and FINRA expect firms to use their position of authority to help protect investors. When they fail to do so, they can—and should—be held accountable, and that’s what we do at Patil Law.

In most cases, this means working with a securities lawyer to file a claim for damages in FINRA arbitration. Brokerage firms consent to arbitration as a condition of registration, and FINRA has the authority to issue damages awards to investors who suffer losses due to brokerage firms’ failure to supervise.

How a Failure to Supervise Investment Attorney Makes a Case

How do you prove you are entitled to financial compensation if you suspect your brokerage firm failed to supervise? Filing a successful claim for this type of negligence requires four elements:

1.    An Underlying Securities Law Violation

To pursue a claim based on a brokerage firm’s failure to supervise, it is first necessary to show that your broker committed an underlying securities law violation. These violations can take various forms and range from making false statements or omitting material information about an investment product to excessive trading, selling away, or selling unregistered securities.

2.    Association Between the Broker and Brokerage Firm

Next, you must prove an association between the broker and the brokerage firm. This is relatively straightforward—broker affiliations are listed on FINRA BrokerCheck, and email addresses, website profiles, and various other pieces of evidence can be used to establish the association. There can occasionally be questions about timing (i.e., whether the brokerage firm employed the broker at the time in question), but this is typically among the easier elements to prove.

3.    Supervisory Jurisdiction

If a brokerage firm has the requisite association with a broker, then the firm will also have the requisite supervisory jurisdiction in most cases. Again, brokerage firms’ duties to supervise under federal law and FINRA Rule 3110 are quite broad. Firms claiming not to have supervisory jurisdiction over their brokers will face an uphill battle.

4.    Failure to Reasonably Supervise

Finally, you must be able to prove the brokerage firm failed to reasonably supervise your broker, perhaps demonstrating a specific failure as listed above or another type of failure depending on the circumstances. While the obligation to “reasonably” supervise limits brokerage firms’ obligations to an extent, firms claiming a particular form of supervision was “unreasonable” will typically face an uphill battle as well. Our securities attorneys can help identify supervisory failures and take the remaining steps necessary to pursue a successful FINRA arbitration claim on your behalf.

Speak with a Securities Lawyer Today About Your Failure to Supervise Claim

To find out if you have a claim stemming from a brokerage firm’s failure to supervise, schedule a free, no-obligation consultation at Patil Law. We represent individual investors in FINRA arbitration against brokers and brokerage firms nationwide. To speak with an experienced investment fraud attorney about your situation in confidence, call 800-950-6553 or tell us how we can help with our online contact form.

What Does it Mean for Your Broker to Receive Excessive Commissions (otherwise called Churning)?

As an investor, your priorities are to protect and grow your wealth. Like anyone using a money manager, you are probably happy to pay your broker a fair fee and any earned commissions. However, like any smart investor, you’ll need to be on the lookout for fraud in your account.

Investment fraud comes in all shapes and sizes. Sometimes, investors are surprised to learn that investment fraud includes situations where their stockbroker engages in excessive trading in their account. Investors can also be defrauded when a stockbroker recommends unnecessary and overly expensive products.

We’ll walk you through a few investment fraud situations for which you should always be on high alert. At Patil Law, we can also help if you think you have been a victim of excessive trading or investment churning and have suffered investment losses as a result.

Why Do Brokers Churn Accounts?

Excessive trading or “investment churning” is the practice of engaging in a number of trades well beyond the number of trades required to maintain the client’s account. Typically, brokers who engage in this type of behavior do it for the sole purpose of generating a higher number of commissions. Investment churning is an extremely risky practice that can result in significant losses for clients. However, churning can generate high commissions, fees, costs, and greatly benefit the individual stockbroker and their firm. Unfortunately, this form of investment fraud is
not uncommon. If you believe you have been a victim of churning in your investment accounts, talk to a securities fraud lawyer as soon as possible.

How a Claim for Commission Abuse Works

Excessive trading can be a cause of action in a Financial Industry Regulatory Authority (FINRA) arbitration claim for damages. Stating a claim for damages in FINRA arbitration can be a complex process. Having an experienced securities fraud lawyer by your side can greatly simplify the process. At Patil Law, we only represent investors like you, never banks or brokers.

To be successful in a claim against a brokerage firm or stockbroker, an investor needs to demonstrate the following:

1. The stockbroker had full control over activity in the investment account; and
2. The amount of activity in the account constituted excessive trading, otherwise known as investment churning, based on subjective and objective factors.

If both of these facts are true of your account, speak with a securities fraud lawyer immediately. Any investor who suspects that they have been harmed by excessive trading or investment churning should bring an arbitration claim against the brokerage firm or stockbroker (or both). It’s important to try to recoup any losses you may have suffered and prevent future churning losses for yourself and other clients who use your broker.

Understanding Whether Trading Is Excessive

When trying to determine whether excessive trading is occurring in your account, an attorney and an arbitrator will typically use both subject and objective tests. It’s common to use complex statistical formulas to test whether trades in the account line up with what an investor should expect. FINRA suitability rules provide the basis for creating those formulas. One such rule states as follows: “factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.” Your attorney will know how to use these rules and formulas to assist you in determining if you are a victim of excessive trading.

Turnover Rate

As an investor, it’s important to understand what’s coming into your account and what’s going out. The turnover rate measures the overall level of activity of trades. The turnover rate is calculated by dividing the total annual purchases in the account by the average balance of the account during a year. If this number is high, then the level of activity in the account is high. For your stockbroker, a higher turnover will generate more commissions and fees.

Note that high turnover in your account doesn’t necessarily mean that there is a problem. In some situations, you may have changed your investment goals throughout the year. Or, you might have needed to sell some financial instruments for tax reasons. There can be perfectly legitimate reasons for a high turnover rate that have nothing to do with broker misbehavior or excessive trading. However, fraud can occur when brokers artificially increase turnover for the sole purpose of generating higher fees.

Cost-Equity Ratio

The cost-equity ratio is another objective measure used to evaluate a trading strategy and test it to see if your broker has behaved fraudulently. The cost-equity ratio measures the annual costs an investor incurs from an investment strategy. This metric is calculated by dividing the total annual account costs (which include commissions and interests) by the average balance in the brokerage account. This objective measure can tell you a bit about how commissions and costs are being allocated to your account by excessive trading. The cost-equity ratio may sometimes be referred to as the “break-even rate of return.”

Subjective Factors

A securities fraud lawyer or arbitrator will also review subjective factors when assessing whether you have been the victim of investment churning. A few key factors to consider are:

1. The level of risk-tolerance communicated to your stockbroker;
2. The stated investment objectives for your account;
3. Your trust and reliance upon your stockbroker;
4. Your understanding of the investment strategy;
5. Your age and level of investment sophistication; and
6. Your net worth and level of funds in your investment account.

Taking into account all objective and subjective factors will give your securities fraud lawyer a better picture of your losses. Subjective factors are also important to consider if the use of high-priced or inappropriate securities have been part of your stockbroker’s excessive trading strategy. Looking at your risk-tolerance and stated investment objectives can tell both your lawyer and a potential arbitrator quite a lot about what kind of securities should be in your investment accounts.

It will also help a potential arbitrator understand the losses you have suffered and the potential for future harm if the stockbroker is allowed to continue their behavior.

What to Do if You’ve Been Harmed by Commission Abuse

The most important thing you can do if you believe you’ve been harmed by excessive trading in your account is to speak with a securities fraud lawyer right away.

An experienced securities lawyer can assess your claim according to the steps outlined above. They can also explain to you what the process might be for proceeding to FINRA arbitration.

What Is FINRA Arbitration?

FINRA provides investors who may have been defrauded or suffered other losses a way to have their claims heard before a panel of arbitrators. FINRA arbitrators are typically well-versed in securities law.

Arbitration is like a streamlined court process. It typically has all the elements of a traditional litigation process (claim, discovery, some motions, and a trial-like setting for hearing the dispute). However, the process is very abbreviated compared to regular jury trials. By proceeding to FINRA arbitration with your claim for damages when you’ve been harmed by excessive trading losses, you’re likely to get a resolution much faster than going through the courts.

What Will an Arbitrator Look for in My Case Against My Financial Advisor for Commission Abuse in My Account?

The arbitrator or securities arbitration panel will look at several factors in determining whether the stockbroker exercised the necessary control over the account to hold them responsible. They’ll also review the objective and subjective factors mentioned above to see whether there was actually excessive trading or investment churning in your account. Importantly, an arbitrator or securities arbitration panel will look closely to see whether you have suffered any losses.

It is possible (but not common) to have churning in investment accounts where the investor does not suffer any actual damages.

In the rare event that you’ve suffered from excessive trading in your account with no losses, you can still file an investor complaint to make FINRA aware of the bad behavior. An experienced securities fraud lawyer can also help you make your complaint. You may even help to save a vulnerable investor from serious future losses!

How Can Patil Law Help?

At Patil Law, we’ve represented hundreds of investors across the U.S. and around the world. Our goal is to help investors like you navigate the challenges of FINRA arbitration while regaining your financial stability. In fact, we have recovered over $25,000,000 for defrauded investors. If you think that you have been the victim of excessive trading, investment churning, or other investment fraud, contact our experienced nationwide investment fraud lawyers today for a free consultation today. Call (800) 950-6553 or email cp@patillaw.com.

Elderly investors can be especially vulnerable to financial abuse from close family, friends, and hired professionals. In some cases, brokers and advisors have cultivated close relationships with elderly investors, only to exploit their trust for their own financial gain.

Elder Financial Abuse: All Too Common

The National Council on Aging estimates that one in 10 Americans aged 60+ has experienced elder abuse, at a cost of $2.6 billion to $36.5 billion annually.

Why are older adults targeted? Studies show that higher levels of trust among older adults may have something to do with changes in the brain–changes that occur even in the absence of dementia. Additionally, caretakers often have access to a lot of personal information, which can make it easy for bad actors to perpetrate fraud.

Signs that an elder is being abused financially include unpaid bills, sudden changes to wills and spending patterns, or unexpected moves to add a beneficiary, executor, or power of attorney to the elderly person’s estate.

Legal Protections For Elders

Because so many elders are vulnerable to financial abuse, states such as New York, Florida, and California have enacted legal protections for the elderly. Also, the Financial Industry Regulatory Authority (FINRA) has implemented rules to protect elders from financial abuse. These include:

•     FINRA Rule 4512: Firms have to make reasonable efforts to obtain a trusted contact person’s name and contact information when opening an account and must contact that person if they suspect financial exploitation or diminished capacity.
•     FINRA Rule 2165: Firms can place a temporary hold on disbursements from an elder’s account if they suspect elder financial exploitation so that a trusted contact can investigate.
•     FINRA Rule 3241: Brokers cannot be named as the beneficiary or an executor of a client’s estate except in carefully specified circumstances.

If you suspect you or a relative may have been the victim of elder financial abuse, contact a securities attorney right away. Securities attorneys at Patil Law can evaluate your case for free and pursue an aggressive strategy for financial recovery. Call 800-950-6553 or email cp@patillaw.com.

New investors often hire financial advisors to manage their investment portfolios. Those financial advisors have “fiduciary duties” to their clients. A fiduciary’s primary duties include:

• Putting the client’s interests first, ahead of their own interests;
• Avoiding conflicts of interests or disclosing conflicts to the client up front; and
• Acting with honesty, good faith, and loyalty toward the client.

Fiduciary duties impose a legal responsibility on the financial advisor, and they can be liable when they breach those duties to their clients. A financial advisor who upholds their fiduciary duties can give investors valuable insight into successful investment strategies and how to maximize returns. But not all financial advisors fulfill their fiduciary duties and put their clients’ interests ahead of their own.

Before hiring investment professionals, you should know what obligations and duties they owe you. This will help you recognize advisor misconduct or negligence more easily when and if it occurs.

If you or a loved one suffered losses after your financial advisor breached a fiduciary duty, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.

What Is a Fiduciary Relationship?

Fiduciary duties arise only in special circumstances where a party reposes trust in someone based on their expertise. Examples include when an attorney acts for a client or a trustee administers an estate for beneficiaries. The scope of a fiduciary’s duties often depend on the kind of relationship. An investment adviser fiduciary relationship is created when you sign an agreement to work with an individual investment advisor or an investment advisory firm.

But not all investment professionals are fiduciaries. Stock brokers who simply execute trades are not fiduciaries. But Registered Investment Advisers (RIAs) are fiduciaries. RIAs register with the SEC and are the only investment professionals who can call themselves “financial advisors.” (Read more about the difference between investment advisers and stockbrokers here.)

 Is My Investment Advisor a Fiduciary?

According to the Investment Advisers Act of 1940, only registered investment advisors are considered fiduciaries. Though stock brokers sometimes use the term, only Registered Investment Advisors are allowed to call themselves financial advisors. The SEC maintains a list of RIAs where you can check if your financial advisor is a Registered Investment Advisor. You can also use the list to see whether the firm your financial advisor is a federally registered investment advisor firm.

What Are the Duties of Stockbrokers?

Broker-dealers and stockbrokers are not Registered Investment Advisors and are not fiduciaries. That does not mean they have no obligations to their clients, however.

Previously, broker-dealers only had to comply with the lower “suitability standard.” However, in 2020, the SEC enacted Regulation BI, also known as the Best Interest Rule. This rule requires broker-dealers to act in the best interests of their clients when making investment recommendations and imposes four main duties on broker-dealers:

• Disclose all the material facts about the services the broker will provide, the fees it will charge, and capacity in which the broker is acting.
• Exercise reasonable diligence, care, and skill when making investment recommendations, and only recommend investments that are in the client’s best interest.
• Establish and enforce written policies on, at a minimum, conflicts of interest.
• Establish and enforce written policies and procedures to comply with Regulation BI.

If you or a loved one suffered losses after your stock broker breached an obligation under Regulation BI, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.

What Constitutes a Breach of Fiduciary Duty?

A breach of fiduciary duty occurs whenever a fiduciary puts their own or someone else’s interest above the interests of their client. This can happen in a wide variety of ways. A few of the most common are detailed below.

Failure to Conduct Due Diligence

Before recommending an investment, a financial advisor has to become informed about its potential risks and rewards, or conduct “due diligence.” This includes investigating:

1. The investment’s cost;
2. The objectives of the product or strategy;
3. Any special characteristics of the investment;
4. Liquidity concerns;
5. Potential benefits and risks; and
6. Likely performance in different market conditions.

Recommending a particular investment or investment strategy is a breach of fiduciary duty.

Recommending Unsuitable Investments

No two investors are the same, so financial advisors have a duty to consider the individual investment profile of each client before making recommendations. In other words, brokers can only recommend investments that are suitable for a specific client’s investment profile.

An investment profile includes information such as the client’s age; employment status; investment time horizon; risk tolerance; liquidity needs; and investment goals.

Utilizing the same investment plan for every client, without taking into account a client’s specific situation, can result in an advisor recommending unsuitable investments. If you or a loved one suffered losses after your financial advisor recommended unsuitable investments, contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via our secure online portal, or by email.

Engaging in or Failing to Disclose a Conflict of Interest

Sometimes, a financial advisor can discover conflicts of interest between themselves and a client, such as when the advisor would benefit personally from a particular investment or trade. When this occurs, your financial advisor should disclose the full extent of the conflict right away, so the client can make an informed decision about whether to waive the conflict or seek other advice.

Excessive Trading

Excessive trading or “churning” happens when an investment advisor buys and sells securities excessively in order to make more money on commissions. You can protect yourself from churning by taking few simply steps, including:

• Reviewing your account statements regularly;
• Keeping track of the fees you’re incurring on trades; and
• Asking for an explanation if you notice lots of activity in your account.

The losses you sustain if a financial advisor churns your account can be recovered through arbitration. Contact our securities fraud attorneys at Patil Law today by phone at 800-950-6553, via secure online portal, or by email.

Unauthorized Trading

Unauthorized trading occurs when a broker or advisor makes trades in a client’s account without their permission. Some investors have “discretionary” accounts, where a trader has permission to make certain kinds of trades. But if an investor has a “non-discretionary account,” the financial advisor has to get your verbal or written authorization prior to making any trades in the client’s account.

If you discover an advisor is making unauthorized trades in a non-discretionary account, it’s important to report the misconduct to their broker-dealer immediately, or the advisor may be entitled to claim that you have “ratified” the unauthorized trade by not voicing your objection right away.

Misrepresentation or Omission of Material Facts

To make an informed decision about their investments, clients need to know all the material information about an investment. Material information is information a reasonable investor would consider necessary to know when making a decision about whether to invest.

Sometimes, financial advisors will misrepresent the possible risks of an investment, or fail to disclose that an investment will not be liquid for a long amount of time. Failing to disclose this kind of information, or misrepresenting material issues, is a breach of an advisor’s fiduciary duties.

Lack of Diversification

Investors know not to put all their eggs in one basket. If your portfolio is heavily concentrated in one particular market or sector, you stand to lose everything if that market crashes. So you financial advisor should recommend a mixture of investments allocated among various asset classes and industries. If your financial advisor failed to adequately diversify your portfolio, you could have grounds to recover your investment losses in FINRA arbitration.

Think Your Financial Advisor Breached a Fiduciary Duty? Contact Patil Law Today

If you suffered investment losses because your financial advisor breached a fiduciary duty, you may be able to recover your losses in FINRA arbitration. Our attorneys have years of experience in identifying and recovering losses from advisors’ breaches of fiduciary duties.

Contact our nationwide investment fraud lawyers today so can you recover the compensation you deserve. Our case evaluation is completely free. Call (800) 950-6553 or email us today.